Boost demand through consumption, investment, export

The decelerating growth for the last few quarters, particularly less than expected growth rate of 4.5% in the second quarter, has raised concerns for policymakers, scholars and also the general public.

The question is, “has the growth rate bottomed out?” The answer is unlikely positive though there could be a positive base effect from this quarter onwards. Most of the core industries are still on a downtrend and therefore it is unlikely that the growth recovery would be sharp in the next couple of quarters.

Yes, there are a series of steps taken by the finance minister since August 2019 such as credit support, lowering of corporate tax rates, support to MSME, exports sector and real estate to revive the economy.

Are these steps enough? It is too early to say as these measures have been taken recently and there is a lag between implementation and turnaround time. Even if that be the case, we need to do much more given the extent of slow down across sectors for a quick recovery.

The core problem today is the lack of aggregate demand. Private final consumption expenditure and private investment are falling and export is not growing. Nothing much can be done to exports directly through the budget immediately and investment will not revive unless consumption demand recovers.

Slow growth, lack of decent jobs, farmers’ distress, stagnant rural wages, and saturation and postponement of consumption by the middle class are mainly responsible for lack of consumption. The forthcoming budget should focus on reviving aggregate demand, particularly consumption and investment, for quick turn around of the economy.

The most important component of the aggregate demand is private final consumption expenditure which is 57% of the GDP. Therefore, the priority of the government in the forthcoming budget should be to put the money directly in the hands of people.

Enhanced fiscal support for well-directed social programmes like MGNREGA will provide employment and income to poor households whose marginal propensity to consume is high. Similarly, higher budgetary support for rural infrastructure projects with a short gestation period and monitored quick implementation will turn around the demand from rural India.

The middle class is the engine of private consumption. All major sectors like automobiles, FMCG, real estate etc, are down. It is time for the government to relook at lowering direct tax rates.

The budget may revise the existing income tax slabs to new one such as no taxes up to Rs 5 lakh, 10% for Rs 5 lakh to Rs 10 lakh, 20% for Rs 10 lakh to Rs 20 lakh and 25% for above Rs 20 lakh income per annum. The peak rate of income tax of 25% will be on par with corporate tax rates.

Apart from the efforts to put more money in the hands of the households, the budget should try to give credit to the non-banking financial companies (NBFCs). A lot of leading sectors are affected due to lack of credit from NBFCs in the recent quarters. It is time to support NBFCs for well-targeted credit support for consumer sectors.

Higher allocation to boost consumption demand and also a public investment in infrastructure will mean missing fiscal deficit target (3.3% of GDP) by 0.5 to 0.75% of GDP. It has its macroeconomic implications including missing the fiscal policy framework recommended by Finance Commission Chairman N K Singh by few more additional years. However, the revival of growth in short-run is more important.

In any case, lower growth would lead to shortfall of revenues as has been the case for the last few months and therefore fiscal deficit will go up. Its time for countercyclical fiscal policy.

Recovery in demand

The government also needs to change its strategy and fiscal allocation for quick recovery in demand. For example, the government can shift its attention from mega highway projects to smaller core sector activities that have a quicker turnaround time.

The slowdown in investment is mainly because of household investment, particularly in the construction sector. Therefore, one more booster dose (in the form of credit support and fiscal incentives) for the construction sector will help revive four core sectors - cement, iron, steel and electricity.

The performance of the MSME sector is crucial for employment, income and demand. Therefore, more support to the MSME sector and more resources for rural employment would be useful.

It is time for day-to-day monitoring and implementation of steps taken by the government for MSME since august 2019. Debt ratio is very high in the private sector, particularly in the corporate sector. On top of that, the corporate sector is badly affected by the liquidity crunch. The government can inject more liquidity (re-capitalisation) to the banking sector and also ensure quick disbursement of payments due to the private sector so that liquidity improves in the economy.

Not much can be done to exports directly through budget but urgently addressing trade facilitation (trade procedures, institutions and logistics) issues will reduce trade and transaction cost and thereby improve exports competitiveness. Small steps such as easing examination, certification, testing etc will reduce duelling or dwelling time considerably.

Export development funds for helping MSME exporters and ensuring the availability of working capital to MSMEs in the exports sector will certainly help. Reinstating the Merchandise Exports from India Scheme (MEIS) and increasing MEIS benefit to 4% from 2% in the forthcoming trade policy will help boost exports.

The government can explore steps like single-window clearance for all exporter refunds and disbursals, and implementation of e-wallet kind of system to address liquidity concerns of exporters. There can be also a special package to labour incentive sectors to create employment and demand.

For example, the textile is a big industry and it has huge export potential. Therefore, budgetary provision for the New Textile Policy for a fully integrated, globally competitive manufacturing and exporting hub is a good idea. Countries like Bangladesh and Vietnam are doing well in these labour-intensive sectors. Overall, all efforts should be made to boost aggregate demand –consumption, investment and exports.

(The writer is a Delhi-based economist)